It is Never Too Early to Save for College

When my son was born just a little over one year ago, one of the first thoughts I had was, “How will we ever afford to send him to college?” I started running rough calculations and realized that we would need to put aside almost $15,000 per year taking into account a 5% growth rate and accounting for modest increases in the cost of attending a four-year college. This simplistic calculation did not account for the fact that we would have so many expenses with a newborn including daycare or the fact that we would like to have more than one child.

As a professional in the college admissions and financial aid industry, I often advise parents to start saving for college as early as possible. I see the stress that the rising cost of an undergraduate degree can induce for even the most financially fit families. Not many people have the luxury of being able to dole out $30,000 to $60,000 per year easily. I know that we cannot afford to wait until our son is a high school student to start thinking about paying for a college education. So I started to do my research and this is what I learned:

1. Plan for retirement first. You can always borrow money for college, but you cannot borrow for retirement. Get your financial house in order for you and your spouse first. If you have the resources, maximize your IRA and retirement account contributions. 2. Have life insurance. I believe it is best to plan for the “just in case”. Get life insurance that will protect your spouse and help pay for living and education expenses. If you are young and healthy, the yearly cost of insurance is worth the peace of mind. The rule of thumb is to get life insurance worth ten times your annual income. 3. Don’t put money under the proverbial mattress. If you are saving, put money in tax-free accounts designed specifically for education. Coverdell accounts allow families to contribute up to $2,000 per year. The money is not tax-deductible, but the investment grows tax-free so distributions are not taxed. And this money can often be used for educational expenses for elementary, middle or high school. Also consider a 529 Plan. Like Coverdell accounts, 529 Plans allow families to save money and the distributions are not taxed. Most plans are state plans run by financial institutions. Your state may even give you a tax break if you invest in that state’s plan. There are no limits on contribution amounts, but this money can only be used for college expenses. These are great plans for families that are trying to catch up on saving for college. While these plans offer you the same growth opportunities as other investment vehicles, one downside is that these accounts are considered the property of the beneficiary for financial aid purposes. And they will lower the financial aid packages your child receives from colleges. This sounds like a negative, but this most likely means fewer loans down the road. 4. Don’t tie up your money too soon. If you invest your money in the education accounts described above, that money can only be used for qualified education expenses. Pulling the money out for other purposes will also mean paying a hefty fine and possibly taxes on the growth. If you want to save without committing, look into CDs or savings accounts. The returns are low and you will get taxed, but the money is yours to use for whatever you need. And if you are a little more risk tolerant, invest in the market. 5. Don’t underscore the value of student loans. I am a strong believer in children having a stake in their education. I paid my way through college and graduate school. I once calculated one class was costing me $200 per session. That alone was incentive to study harder.

My clients often tell me how fast kids grow up. And while I am not quite ready for my little one to head to college just yet, I do know that when he is ready we will be financially prepared.

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